Chinese internet giant NetEase announced it plans to spin off Cloud Village, the operator of its music streaming service NetEase Cloud Music, in an initial public offering (IPO) on the Hong Kong Stock Exchange.
The Hangzhou-based tech firm filed a listing application for Cloud Village to the Hong Kong bourse on Wednesday, seeking to raise about $1 billion, Bloomberg reported, citing unnamed sources. Domestic media outlet Jiemian News reported that the company plans to set the maximum price for its music wing’s debut at HK$330 per share. NetEase said details of the proposed spin-off, including the size of the offering, have not yet been finalized.
China International Capital Corporation, Credit Suisse (Hong Kong) and Merrill Lynch (Asia Pacific) are acting as joint sponsors for the deal, according to the filing. The proposed offering is still subject to final approval by the Hong Kong bourse’s listing committee.
If the proposal goes through, NetEase will hold at least 50% of the voting rights of Cloud Village, meaning that the company will remain a NetEase subsidiary following the IPO. NetEase owns 62.46% of Cloud Village’s total issued share capital.
Earlier this month, NetEase struck a distribution agreement to license music directly from Sony Music Entertainment, adding momentum to the company’s efforts to expand its music library and paying user base. According to NetEase’s press release announcing the deal, it would also explore new monetization opportunities by teaming up with the music powerhouse in areas such as music vlogs and online karaoke.
This move ended an exclusive arrangement between Sony and Tencent Music Entertainment, NetEase Cloud Music’s biggest competitor. Over the years, Sony Music, along with other two major international labels – Universal Music and Warner Music Group, had sold exclusive rights to a fair chunk of their music catalogs to Tencent Music, which then sub-licensed that content to smaller rivals including those operated by NetEase, Alibaba and Xiaomi. According to NetEase CEO William Ding, NetEase had to “pay two to three times the reasonable cost” for content under such arrangements, Bloomberg reported.
Chinese regulators launched an antitrust investigation in 2018 to review Tencent Music’s deals with the three record labels but suspended it in 2019 after the company agreed to stop renewing some of the exclusive rights, Reuters reported. Sony Music Entertainment is the latest of three major labels to terminate exclusive licensing deals with Tencent Music.
However, since Beijing abruptly halted Ant Group’s $34.5 billion IPO last November and vowed to intensify its anti-monopoly action against the country’s tech titans, Tencent has started facing heightened antitrust pressure. Last week, Tencent Music’s Chief Strategy Officer Tony Yip confirmed in a post-earnings call that the firm recently “received increased regulatory scrutiny from relevant authorities”. According to some, this is a sign that Tencent’s dominance in China’s online music-streaming market will be challenged and NetEase’s position is set to be boosted.
A day after NetEase announced the new music deal with Sony Music Entertainment, the company released its better-than-expected financial results for the first quarter on May 18. It reported 20.5 billion yuan ($3.21 billion) in net revenue, an increase of 20.2% year-on-year, beating market expectations of 20.1 billion yuan ($3.15 billion). Net revenues from its “innovative businesses and others”, a division which includes music streaming business, were 4.2 billion yuan for the first quarter, up 39.7% year over year. The company attributed the surge in gross profit primarily to the improved performance of NetEase cloud music.
NetEase Cloud Music had more than 180 million active users in 2020, of which 9% paying subscribers, according to its preliminary prospectus. As a comparison, Tencent Music had about 615 million active users for the first three months of the year.
The prospectus also revealed that last year, NetEase Cloud Music’s revenue jumped 111.2% to 4.9 billion yuan ($767 million), while its net loss widened to 3 billion yuan ($470.6 million) from 2 billion yuan ($313.7 million) in 2019. The company’s music arm is still losing money largely due to its high content costs, which are almost as much as its 2020 sales.
Last June, NetEase itself launched a $2.7 billion secondary listing in Hong Kong, two decades after its IPO on the Nasdaq. The company saw its Hong Kong-listed stocks climb 0.83% to HK$182 ($23.45) per share on Thursday.